Netflix Open Connect vs. Cable: Does it Matter Who's Right?

Teachers or anyone else who’s ever been in charge of a group of kids knows how challenging it can be to sort out which kid is right or wrong when a dispute arises – especially if the initial moments of the dispute arose outside earshot or while the grown-up was involved in something else.

And that’s pretty much the situation most telecom stakeholders find themselves in with regard to ongoing disputes between Netflix and certain cable companies in the transportation of Netflix content to cable company broadband customers.

The occasional press release or other news bite from one of the parties lands in our inboxes from time to time in much the same way an eight-year-old might come to us to tell us another kid called him a bad word. With Netflix and the cable companies, as with the feuding kids, we don’t know the whole story – and sorting out who’s being wronged is no simple task based on the limited knowledge we have of the situation.

What’s publicly known about the Netflix-cable company saga goes something like this:

2011 – Netflix backbone provider Level 3 accuses Comcast of violating Network Neutrality guidelines designed to prevent broadband providers from discriminating against certain types of content. Level 3 says Comcast has refused to upgrade its connections to support the increased volume of traffic Level 3 is delivering to Comcast as a result of Netflix’s booming streaming video offering. Cable companies undoubtedly are not thrilled about the growing popularity of Netflix streaming services, which threaten their video business.

But the cable companies are not widely seen as the bad guy in this dispute, as many industry stakeholders find Level 3’s Net Neutrality charges to be too much of a stretch.

2012 – Netflix begins publishing performance data indicating which broadband providers offer the best streaming video experience for Netflix users – a move potentially aimed at reminding cable companies that customers may decide which broadband provider to use based, in part, on how well Netflix works on each provider’s network.

2013 – Through a program called “Open Connect,” Netflix makes its “Super HD” content available only to broadband providers that agree to certain conditions, including free peering. Netflix also offers broadband providers the option of obtaining free storage appliances aimed at minimizing the amount of traffic that must be sent from Netflix to the provider.

Time Warner Cable provides a statement to several news outlets accusing Netflix of “closing off access” to some of its content and seeking “unprecedented preferential treatment” from broadband providers. This may sound familiar to any grown-ups that have used the same basic argument with kids. Time Warner is essentially saying, “If we let one of you do this, we’d have to let all of you do it.”

Undaunted, Netflix says it aims to serve all Netflix video over Open Connect.

Open Connect details

I asked Netflix for some additional details about Open Connect in the hope that the answers might put me in a position to offer a judgment on this dispute.

One thing I learned was that the issue now has moved beyond Level 3. A Netflix spokesman noted that the company uses “multiple Internet transit providers as well as (in some markets) legacy content delivery networks for ISPs that are not directly connected to Open Connect.”

According to the Netflix spokesman, “Level 3’s peering policy has no direct bearing on Open Connect.”

Netflix now seems to be handling its own traffic exchange agreements with broadband providers – at least for Open Connect. “If the [broadband provider] is present in any of the same peering locations as Netflix Open Connect, the [broadband provider] should peer with Open Connect in order to support cache fill traffic, as well as play of titles not present on the caches,” the Netflix spokesman said. “In a small number of cases where ISPs have no presence in common Internet exchange locations, other arrangements can be made.”

The idea of filling the cache relates to the free storage appliances Netflix is offering.

The spokesman noted, however, that, “The Open Connect Appliance is not a typical demand-driven cache. Rather it is a custom-designed server optimized for storing and serving large-scale, high-quality video content that is pre-populated during off-peak hours. This pre-population is based on frequent evaluation of content access patterns, and enables the maximum amount of Netflix content to be served with minimum upstream traffic on the [broadband provider’s] network.”

In other words, Netflix hopes to minimize the need for broadband service providers (including cable companies) to upgrade their connections to Netflix by minimizing the amount of traffic Netflix has to send to the broadband providers.

This actually seems like a creative solution to the years-long content vs. eyeballs dilemma.

Content vs. Eyeball Networks

Broadband providers, whose customers provide the eyeballs that watch the content, have complained before that they have to carry more traffic from content providers than they send to the content providers, thereby incurring higher network costs.

Open Connect seems like a good way of minimizing those costs.

And while the cable companies seemed to have the public sympathy when Level 3 raised its Net Neutrality complaints, that situation now seems to have reversed itself. Netflix has attempted to address the cable companies’ concerns by offering the cable companies the free storage appliances. Any cable company that fails to accept that solution will appear ungrateful.

Ultimately, though, this isn’t a dispute about who’s being fair or reasonable and who’s not. Netflix has cleverly leveraged its market power to find a new bargaining chip with the cable companies. The content provider already has established its popularity with the end users who consume its content, many of whom would like to get Super HD as well.

If the Netflix offering were not so strong, these tactics wouldn’t work.

The cable companies are not totally at Netflix’s mercy, however. Amazon, for example, offers a streaming video service – and it would be surprising for that company not to have an HD offering in the works.

And considering the success of Netflix, some other companies also may be working on a competitive service.

If the cable companies hold out against Netflix on Open Connect, some of these Netflix competitors might be more than willing to cooperate with the cable companies on traffic exchange issues in order to get access to Super HD- free (and perhaps one day Netflix-free) consumers via the cable companies’ broadband connections.

Laissez faire

Sometimes a grown-up’s best approach in mediating between feuding kids is to let them work things out themselves, while keeping an eye out to make sure disputes don’t escalate. I would argue that it’s also the appropriate approach toward Netflix and the cable companies.